Chinese banks lean towards mortgage rate cuts, heeding Beijing's call to make homes more affordable and arrest housing slump

Several Chinese banks have made pledges to cut mortgage rates, answering Beijing's call to make homes more affordable and help arrest a multi-month slump in the nation's housing market, according to various reports, a move which analysts said will have a big impact on lenders' net interest margins.

The pledges follow the central bank's indication it would guide commercial banks to adjust existing mortgage rates in its quarterly monetary policy report, which analysts interpreted as a sign that reductions in borrowing rates are forthcoming.

In another move that seeks to support the beleaguered sector, Guangzhou's government authorities bureau announced plans to ease mortgage curbs. In a statement on its official website, the city government said it would allow more homebuyers to enjoy preferential loan rates for first-home purchases regardless of their credit history.

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Bank of Communications, China's fifth-largest bank, or BoCom, as the lender is known, held an internal meeting to "initiate the project to adjust the existing mortgage rates on personal home loans," according to a notice obtained by the Post. The bank's investor relations officers said they are not authorised to disclose information to the public about the meeting.

A mortgage rate cut by BoCom could induce larger banks to make the same move. China's central bank and housing ministry eased their mortgage rules last Friday to count households that do not have a house registered under any family member as "first-time homebuyers."

Other local commercial banks have also mentioned potential rate cuts during their recent earnings calls. CITIC Bank is "closely monitoring regulator directions and market movements" while making plans for adjustments." China Merchant Banks said a cut is "imperative" pending a final decision, its president Peng Jiawen said.

A 50-basis point cut to existing mortgage rates can potentially boost retail sales by 0.4 per cent in a best-case scenario, according to Gary Ng, a senior economist at Natixis Corporate and Investment Bank. It may not be a "game changer" given the high tendency to save among Chinese households, he added.

"Cutting outstanding mortgage rates is a positive step towards lowering household burden and stimulating consumption," he said. "However, the impact may be less as the move only partially repairs consumer confidence. It does not change the fundamental problem of deteriorating economic and income growth outlook."

Bank of Communications in Beijing, China. Photo: Simon Song alt=Bank of Communications in Beijing, China. Photo: Simon Song>

Investor relations officers at China Construction Bank (CCB) and Agricultural Bank of China said they cannot comment if the lenders are planning similar cuts. Industrial and Commercial Bank of China and Bank of China could not be reached for comment.

"The policy is unclear at the moment," a CCB spokesperson said. "We are still in communication with regulators."

The reductions are still being discussed and would take time to be finalised, analysts said.

"We understand regulators are still evaluating the proposals and the estimated impact from different banks before publishing final guidance for implementation," said Everbright Securities International analysts in a report. "The impact on banks' NIMs is significant, and unavoidable, but we believe measures have been and will be taken to mitigate this."

"We expect the central bank and NFRA will only launch the process via window guidance, or via a very general notice given the complexity of the implementation at the ground level," the report said, referring to China's newly installed regulator, the National Financial Regulatory Administration (NFRA).

Nine days ago, China's central bank surprised the market when it reduced the one-year loan prime rate (LPR) used as the benchmark for corporate loans by a less-than-expected 10 basis points, while leaving the five-year rate on mortgages unchanged. The decision raised concerns China is failing to soften the blow to the housing market, sending onshore stocks into a tailspin.

China stepped in to put a floor under the equities market this week by halving the stamp duty on stock transactions to 0.05 per cent, making Shanghai and Shenzhen two of the world's cheapest markets for dealing in securities after New York and Tokyo.

China's outstanding mortgage loans dropped for the first time on record in July, according to the central bank, underscoring the urgency for the government to take more measures to prop up the ailing property sector.

"The decision to lower rates for existing homeowners ahead of the annual adjustment is a step in the right direction, as it will address some of the existing issues in policy transmission," said Carlos Casanova, UBP senior economist Asia. "Moreover, it means they are gearing up for larger cuts to the five-year LPR in the months ahead."

Personal mortgage loans shrank 0.7 per cent in the second quarter from a year earlier to 38.6 trillion yuan (US$5.4 trillion), according to a report published by the People's Bank of China on July 28. That marks the first quarterly decline since records began in 2004. In the first quarter, mortgage loans rose 0.3 per cent from a year earlier.

"Reducing existing mortgage rates [will result in] a loss for banks in the short term, but [will enhance] credit stability in the medium and long term," said Yan Yuejin, director of Shanghai-based E-house China Research and Development Institute. "Under similar policies, the operation of early repayment of mortgage loans has been reduced, and also objectively helped to reduce pressure on individual homebuyers."

Homeowners in China started a "mortgage boycott" earlier this year to protest against late completion and delivery by weak developers, before moving to prepay their mortgages to reduce their interest burden. Beijing had been keeping mortgage rates high to cool the market, until a U-turn late last year as the crisis deepened.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

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